MIE 754 - Class #13 MIE 754 - Class #13 Manufacturing & Engineering Manufacturing & Engineering

EconomicsEconomics

• Term ProjectTerm Project– Next week guest lectureNext week guest lecture

• Concerns and QuestionsConcerns and Questions• Quick ReviewQuick Review• Today’s Focus:Today’s Focus:

Chap 5 Estimating for Economic Chap 5 Estimating for Economic Analyses (continued)Analyses (continued)

Concerns and Questions?Concerns and Questions?

Mid-Term Exam - to be determined Mid-Term Exam - to be determined (approx 2-3 weeks), following Chap 17(approx 2-3 weeks), following Chap 17

Supplemental reading for Chap 17 to be Supplemental reading for Chap 17 to be distributed shortly distributed shortly

Reminder - Chap 5 homework due next Reminder - Chap 5 homework due next classclass

Quick Recap of Previous ClassQuick Recap of Previous Class

What is a cost estimate?What is a cost estimate?

What’s the purpose of a cost What’s the purpose of a cost estimate?estimate?

Sources of errors in cost estimatingSources of errors in cost estimating

Sources of dataSources of data

Quantitative estimating techniquesQuantitative estimating techniques

Quantitative Estimating Quantitative Estimating TechniquesTechniques

1.1. Time-seriesTime-series - when cost (revenue) - when cost (revenue) elements are a function of time. elements are a function of time. Collect data; study underlying Collect data; study underlying relationships.relationships.

• RegressionRegression - estimating causal - estimating causal relationships within time-series datarelationships within time-series data

• Exponential SmoothingExponential Smoothing - estimating - estimating future extensions to historical data future extensions to historical data patternspatterns

Quantitative Estimating Quantitative Estimating TechniquesTechniques

2.2. SubjectiveSubjective - expert judgment is - expert judgment is applied to the results of time-series applied to the results of time-series techniques (how future might differ techniques (how future might differ from the past)from the past)• Delphi TechniqueDelphi Technique - voice opinions - voice opinions

anonymously and through an anonymously and through an intermediaryintermediary

• Technology ForecastingTechnology Forecasting - procedures for - procedures for data collection and analysis to predict data collection and analysis to predict future technological developments and future technological developments and their impactstheir impacts

Quantitative Estimating Quantitative Estimating TechniquesTechniques

3.3. Cost EngineeringCost Engineering - identify and - identify and utilize various revenue/cost drivers utilize various revenue/cost drivers to compute estimatesto compute estimates

Exponential SmoothingExponential Smoothing

Assumes trends and patterns of the Assumes trends and patterns of the past will continue into the futurepast will continue into the future

More weight on current dataMore weight on current data No assumption of linearityNo assumption of linearity

with with ’= smoothing constant,’= smoothing constant,SStt = = ‘x‘xtt + (1 - + (1 - ‘)S‘)St-1t-1 (0(0’’1)1)Usually (0.01Usually (0.01’’0.30)0.30)

(Forecast for period t+1, (Forecast for period t+1, made in period t)made in period t) = =

’’(Actual data point in period t) (Actual data point in period t) + (1-+ (1-’)(Forecast for period t, ’)(Forecast for period t, made in period t-1)made in period t-1)

’ ’ = 1 implies?= 1 implies?’ ’ = 0 implies?= 0 implies?

Example Problem 5-8Example Problem 5-8

Actual sales of a firm were 500 units for year 1 Actual sales of a firm were 500 units for year 1 and 600 for year 2. You forecsted it would be and 600 for year 2. You forecsted it would be 550 units for year 2, and now you wish to 550 units for year 2, and now you wish to forecast for year 3 and beyond.forecast for year 3 and beyond.• What would be your forecast for year 3 if your What would be your forecast for year 3 if your

smoothing constant was 0.1, 0.5, and 0.97?smoothing constant was 0.1, 0.5, and 0.97?• Suppose actual sales for years 3 - 7 are 700, Suppose actual sales for years 3 - 7 are 700,

800, 700, 600, 600 respectively. What would 800, 700, 600, 600 respectively. What would have been the forecast for each year 4-7 have been the forecast for each year 4-7 using the 3 smoothing constants?using the 3 smoothing constants?

• Desirability of low or high smoothing const?Desirability of low or high smoothing const?

Example Problem 5-8Example Problem 5-8

Period # 3 4 5 6 7

Actual 700 800 700 600 600

Forecast @ ’ = 0.1 555 569.5 592.55 603.3 602.97

Error (Forecast -Actual)

-145 -230.5 -107.45 3.3 2.97

Forecast @ ’ = 0.5 575 637.5 718.75 709.38 654.69

Error (Forecast -Actual)

-125 -162.5 18.75 109.38 54.69

Forecast @ ’ =0.97

598.5 696.96 796.9 702.1 603.1

Error (Forecast -Actual)

-101.5 -103.04 96.9 102.1 3.1

Sources of DataSources of Data

Accounting RecordsAccounting Records

Other Sources Within the FirmOther Sources Within the Firm

Sources Outside the FirmSources Outside the Firm

Research & DevelopmentResearch & Development

Quantitative Estimating Quantitative Estimating TechniquesTechniques

3.3. Cost EngineeringCost Engineering - identify and - identify and utilize various revenue/cost drivers utilize various revenue/cost drivers to compute estimatesto compute estimates

Manufacturing Cost Estimating

Objective:

To make a product that can be sold at a competitive priceyet yields a reasonable profit.

Determining Selling Price:

SP/unit = (Total Mfg. Costs for X units)(1 + profit)X

To estimate the cost of a manufactured product, you needa product design and process plan to compute directlabor hours and material costs. A cost estimatingworksheet or spreadsheet is a useful tool for this.

E s t i m a t i n g M a n u f a c t u r i n g C o s t s - B r e a k d o w n o f P r o d u c t C o s t s

Direct Costs

Indirect Costs

plant overheadgeneral and administrativeengineering design/devlpmt.supervisionquality controletal

direct labor

materials

ProductCosts

Developing Cash Flows for Feasible Alternatives

Basic Components

I. Work Breakdown Structure

II. Cost and Revenue Structure (classification)

III. Estimating Techniques (models)

I. Work Breakdown Structure (WBS)

The WBS technique organizes activitiesinto a hierarchical structure based oneither functional or physical categories

WBS - Organizational Schemes

• Functional

• Physical

WORK BREAKDOWN STRUCTURE

Functional Physical Logistical Support Labor Project Management Material Marketing Energy Engineering Capital System Integration

WBS for Commercial Building Project (text or tabular format)1.0 Commercial Building Project

1.1 Site Work and Foundation1.1.1 Site Grading1.1.2 Excavation1.1.3 Sidewalks/Parking1.1.4 Footing/Foundation1.1.5 Floor Slab

1.2 Exterior1.2.1 Framing1.2.2 Siding1.2.3 Windows1.2.4 Entrances1.2.5 Insulation

1.3 Interior1.3.1 Framing1.3.2 Flooring/Stairways1.3.3 Walls/Ceilings1.3.4 Doors1.3.5 Special Additions

II. Cost and Revenue Structure

• Investment Costs (Fixed and WorkingCapital)

• Labor Costs

• Material Costs

• Maintenance Costs

• Property Taxes and Insurance

• Quality (and Scrap) Costs

• Overhead Costs

• Disposal Costs

• Revenues from all Potential Sources

• Salvage or Market Values

III. Estimating Models (techniques)

• Indexes

• Unit Method

• Exponential Costing

• Learning Curves

Cost IndexesCost Indexes

A dimensionless number that indicates A dimensionless number that indicates how costs and prices change with timehow costs and prices change with time

Used to estimate present or future costs Used to estimate present or future costs based on past costs.based on past costs.

In-class notes and examples followIn-class notes and examples follow

Also refer to Virtual Classroom web site Also refer to Virtual Classroom web site for examplesfor examples

Unit Method

Utilizes a “per unit” factor that can beestimated effectively.

- construction cost per square foot

- operating cost per mile

- maintenance cost per hour

Refer to on web site for example calculationsRefer to on web site for example calculations

E x p o n e n t i a l C o s t i n g

T h i s e s t i m a t i n g m o d e l a s s u m e s t h a tc o s t v a r i e s a s s o m e p o w e r o f t h ec h a n g e i n s i z e o r c a p a c i t y .

C A

C B

S A

S B

X

C A C BS A

S B

X

C = c o s t , S = s i z e , X = c o s t c a p a c i t y f a c t o r

In-class exampleIn-class example

Sources and Limitations of IndexesSources and Limitations of Indexes

SourcesSources• Engineering News RecordEngineering News Record• Producer Prices and Price IndexesProducer Prices and Price Indexes• Consumer Price Index ReportConsumer Price Index Report

Limitations of IndexesLimitations of Indexes• They represent composite dataThey represent composite data• They average dataThey average data• Various base periods are used for different Various base periods are used for different

indexesindexes• Accuracy is limited for periods greater than 10 Accuracy is limited for periods greater than 10

yearsyears

Learning Curves

As a task is performed repeatedly, learning occursand the number of input resources (labor, material)required to complete successive units decreases.

Most learning curves are based on the assumptionthat the number of input resources neededdecreases by a constant percentage each time thenumber of units produced doubles.

Z u = K u n

Z u = t i m e t o m a k e u t h u n i tK = t i m e t o m a k e f i r s t u n i ts = l e a r n i n g c u r v e p a r a m e t e r( e . g . , s = 0 . 8 f o r a n 8 0 % l e a r n i n g c u r v e )

n = l o g ( s )

l o g ( 2 )

EXAMPLE

It has been determined that a 90% learning curveapplies to a particular assembly operation. It takes 30minutes to assemble the first unit. How manyminutes are required to produce the 5th unit? the 30thunit?

n = log (0.9) / log (2) = -0.152

Z5 = 30(5)-0.152 = 23.49 minutes

Z30 = 30(30)-0.152 = 17.89 minutes

Other computations related to learning curves:

Tu = cumulative time to produce u units

= K[1n +2n +...+un]

Cu = cumulative average for u units = Tu/u

Continuing example,

T5 = 30[1-0.152 + 2-0.152 + 3-0.152 + 4-0.152

+ 5-0.152] = 130.18 minutes

C5 = T5 /5 = 130.18/5 = 26.04 minutes per unit

Learning Curves - Example

A batch of 50 throttle assemblies defines one output unitand 36.48 factory labor hours is based on the 16th outputunit. What was the number of factory labor hoursrequired for the first batch of 50 throttle assemblies, andwhat is your estimate of the labor hours needed for the64th and 100th output units, assuming a 90% learningcurve?

How many units must be produced until only 24.85factory labor hours are required?

Worked In-classWorked In-class